Gauntlet makes the following recommendations to optimize risk and capital efficiency for Acala and Karura:

Recommendations:

• We recommend decreasing the ACA liquidation ratio from 1.75 to 1.7.
• We recommend decreasing the ACA minimum collateral ratio from 2.2 to 2.1.
• We recommend increasing the KSM liquidation ratio from 1.4 to 1.45.
• We recommend increasing the LCDOT minimum collateral ratio from 2.7 to 2.8.
• We recommend increasing the LDOT liquidation ratio from 2.25 to 2.3.
• We recommend increasing the LDOT minimum collateral ratio from 2.8 to 2.85.
• We recommend increasing the LKSM liquidation ratio from 1.8 to 1.85.
• We recommend increasing the LKSM minimum collateral ratio from 2.3 to 2.4.

Rationale:

The VaR is $3.5M, and our recommendations will reduce it to $3.4M. ACA has a VaR of $1.1M. KAR has a VaR of $888k. LCDOT has a VaR of $472k. LDOT has a VaR of $334k. LKSM has a VaR of $674k. DOT and KSM both have a VaR of $0.

ACA is relatively safe from a market risk perspective, so can have its liquidation ratio gradually lowered to improve capital efficiency. KSM, LDOT, and LKSM are relatively riskier, so we recommend increasing their liquidation ratios to reduce insolvency risk. DOT, KAR, and LCDOT’s liquidation ratios are currently at an optimal balance of risk and capital efficiency.

Potential Forced Liquidations:

Whenever we raise liquidation ratios, there’s a chance that some users may immediately become liquidatable as a result. However, as of our latest data, there are no borrowers with liquidation ratios below those we have recommended.

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